Being in debt doesn’t synonymously go hand-in-hand with saving money—or does it? If you’re dedicated to debt management, you’ll find that you can actually do both.
While paying down debt is always a priority, making sure to put enough money away so that you have an emergency fund is just as important for financial planning. We all know that financial emergencies arise, so backup funds are key to ensuring you don’t put yourself in more debt.
Here are some ways to approach your budget as you get started on paying down your debt:
Cut Out Unnecessary Expenses. Do you need five subscription services? Probably not. By looking at all your expenses, including your luxury expenses, you can help whittle down your budget so that you have more cash flow each month—which you can put toward savings and paying your debts in a timely manner.
Pay Monthly Expenses. Before you put money away, make sure you pay your monthly expenses first, including your mortgage, car payment, groceries, gas, and other necessities. Once you have that figured out, you’ll want to take what you have left over and decide how you want to disperse it between your savings and debt.
Start Saving. Many experts suggest you start by saving three to six months of your monthly expenses before starting a more aggressive repayment plan. At least three months will provide you with a cushion should an emergency arise, so you don’t end up putting more on your credit cards.
Methodology. The 80/20 rule, which is a simplified version of the 50/30/20 method, essentially dictates you put 80% of your monthly take-home and apply it to expenses while 20% goes toward savings and debt repayment.
While it might seem like the best thing you can do is get your debt paid off, by doing both, you’re implementing stability into your life.
Repayment. There are different methods of repayment, but once you’ve decided how much you’re going to put away into your savings, you’ll want to decide how best to attack your debts.
- The debt avalanche: This means you pay the minimum on all your cards except the one with the highest interest rate, which you pay more toward. Once it’s paid off, you’d do the same with the next highest interest rate loan.
- Debt snowball: While paying the minimum on your other cards, you pay off your cards starting with the one you owe the least amount on and work your way up to the largest.
Debt Management Plan. If you find that paying off your debts is overwhelming, it’s time to speak to a credit counselor about your options. A credit counselor will sit down with you and help you budget, and if they think you’re a good candidate, they’ll recommend you for a debt management program, which will help you pay down your debt and save for your future.
When you refocus your budget toward paying off debts, you’re also refocusing the way you approach your finances, making for better money habits. This can help you redirect funds into savings so that while you’re paying down debt you’re also saving for your future—creating a healthier financial situation all around.
Ready to save and repay your debts? CCCS of Rochester offers credit counseling, debt management, and financial literacy workshops.